Chapter 3 Study Guide

Chapter 3 Study Guide - CHAPTER 3 ADJUSTING THE ACCOUNTS...

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CHAPTER 3 ADJUSTING THE ACCOUNTS STUDY OBJECTIVES 1. EXPLAIN THE TIME PERIOD ASSUMPTION. 2. EXPLAIN THE ACCRUAL BASIS OF ACCOUNTING. 3. EXPLAIN THE REASONS FOR ADJUSTING ENTRIES. 4. IDENTIFY THE MAJOR TYPES OF ADJUSTING ENTRIES. 5. PREPARE ADJUSTING ENTRIES FOR DEFERRALS. 6. PREPARE ADJUSTING ENTRIES FOR ACCRUALS. 7. DESCRIBE THE NATURE AND PURPOSE OF AN ADJUSTED TRIAL BALANCE. *8. PREPARE ADJUSTING ENTRIES FOR THE ALTERNATIVE TREATMENT OF DEFERRALS.
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CHAPTER REVIEW Timing Issues 1. (S.O. 1) The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods. 2. Accounting time periods are generally a month, a quarter, or a year. The accounting time period of one year in length is usually known as a fiscal year. Accrual Basis of Accounting 3. (S.O. 2) The revenue recognition and matching principles are used under the accrual basis of accounting. Under cash basis accounting, revenue is recorded only when cash is received and expenses are recorded only when paid. 4. Generally accepted accounting principles require accrual basis accounting rather than cash basis accounting because the cash basis of accounting often leads to misleading financial statements. Revenue Recognition Principle 5. The revenue recognition principle states that revenue should be recognized in the accounting period in which it is earned. The Matching Principle 6. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues). Adjusting Entries 7. (S.O. 3) Adjusting entries are made in order for: a. Revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred. b. The revenue recognition and matching principles to be followed. 8. (S.O. 4) Adjusting entries are required every time financial statements are prepared. Adjusting entries can be classified as (a) deferrals (prepaid expenses or unearned revenue) or (b) accruals (accrued revenues or accrued expenses). Deferrals
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This note was uploaded on 02/13/2011 for the course ACCT 510 taught by Professor Tewes during the Spring '09 term at Davenport.

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Chapter 3 Study Guide - CHAPTER 3 ADJUSTING THE ACCOUNTS...

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